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ACCA Strategic Professional · Advanced Taxation (UK) · Alternative ways of achieving personal or business outcomes and their tax consequences

Omar's employer lends him £40,000 at 1% interest, and the balance is unchanged throughout the tax year. The official rate of interest is 3.75%. Assuming the loan is not otherwise exempt, what is the taxable benefit for the year?

The benefit is £1,100. The employer-loan benefit is the official rate of 3.75% less the 1% interest paid, which is 2.75%, applied to the £40,000 balance. Using 3.75% alone, or adding the interest paid, gives the wrong figures.

  1. A£1,500
  2. B£1,100Correct
  3. C£400
  4. D£1,900

Explanation

The benefit is the official rate less the interest actually paid, applied to the loan: £40,000 × (3.75% − 1%) = £40,000 × 2.75% = £1,100. £1,500 ignores the interest Omar pays. £400 uses only the 1% he pays. £1,900 adds the interest paid instead of deducting it.

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